Not all businesses who have happy customers, exceptional staff, and a great-selling product are doing great in terms of liquidity. Many a business has created a cash flow statement at the end of the year only to realise that the entire time they’ve been working on credit and now they only have enough to pay back their investors.
Well, though companies can raise capital, the more you raise, the higher the liability to pay back will be. Therefore, the best way to keep your company’s liquidity intact is to maintain a healthy cash flow within the business.
However, if after all your efforts, your cash flow is still not looking good, you need to go deep into the problem to fish out a solution, before your business really starts to suffer.
Read on to discover the signs that your cash flow strategy needs correcting:
- When you have a heap of short-term debts to pay
Of course businesses do not work solely on cash, and taking credit from suppliers is nothing new. However, when you realise that your short-term debts are piling up, it is time to pay some of them off.
Whether it is your raw material supplier, operating cost expenses, or deferred advertising expenses that are still waiting to be paid off, you need to contact your creditors and start making payments. But before making the payments and clearing your debts, start cutting down on the cost of running your business and pay the existing creditors before lifting more money from the market.
- Your business is surviving at the mercy of a few big clients
If your business relies majorly on the purchases made by just a few clients, you could end up in big cash inflow trouble if one or two of them are not able to pay you on time.
To deal with this situation, you need to go the extra mile and produce a greater demographic. In this way, your business will not depend on the purchases made by a few bigshots. Even if small, a diverse group of clients will provide you with more financial security because even if one or two fail to pay back their credit on time, the rest of them will still be keeping your cash flowing. This inflow of cash will help you continue giving out payroll and maintain liquidity.
- You have inventory piling up
The more inventory you have, the worse it will make your cash flow statement look. This is because if you have inventory piling up in your storage, even though you count it as an asset, it is of no value until sold. Therefore, use the popular “just-in-time” production method and manufacture products only when they are bound to be sold.
In addition, you could let go of slow-moving inventory at a discount to save on storage costs and backlogs.
- You have decreasing sales
When your sales are decreasing alarmingly, there is no way that your cash flow statement is going to show a positive change. However, this is not something your business can let go. Every business strives for profits, and there is no way you are going to get it without sales.
Therefore, you need to go back to your promotion strategies; look at your advertisements and marketing programmes, have your product redesigned, and give a new look to the business. This will help your product get a new customer base and give your business a chance to shift towards positive cash flow once again.
- Accounts receivables are increasing
Even though an increase in debtors has a positive increase in sales, if it is happening ceaselessly with no cash coming in, your business might be in trouble.
Accounts receivables means that even though you are manufacturing and selling the product, many buyers are just not paying you. This reduces your cash flow and, in turn, the liquidity of the business.
To counter this problem, put a cap on the longest credit period of 30 days at max, offer discounts to customers who pay via cash or cheques within a week of purchase, and keep a check on the payback behaviour of your customers. Once you know which customers are not paying back on time, or at all, do not extend them further credit. This might sound a bit harsh but will save your business from serious damage.
- Your employees feel insecure
For the smooth functioning of the business, you need your employees to be motivated. And, it is payroll that accounts for 90% of employees’ motivation. Hence, if you are low on cash and haven’t made payroll this month, whilst employees might accept it once or twice, they will start to feel insecure in their job eventually and look for other prospects.
To fix this issue, hire and retain only the employees whom you can pay every month. If not, laying off is a painful but viable option so that your enterprise is not making people work for no pay.
- You are not getting discounts on purchases
Nothing can be more horrifying for a business owner than making purchases at one price when you could have gotten the raw material for a discounted price. The only reason why you are not able to avail the discounts is that you do not have the cash to pay back within 30 days.
Well, no matter how well your product is doing, if cash is not coming in to get you discounts, you are losing out on a big chunk of profits.
You can solve this problem easily by only ordering the raw material that can be paid for. This strategy will work well if there are no additional costs associated with multiple ordering.
In a nutshell, you need to be as vigilant about your cash inflow and outflow as you are with other functions of the business. Studying the cash flow regularly will ensure that your debts and stock don’t pile up, you have a diverse client base, cash is coming in from the buyers, and your employees feel secure.